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TEN YEARS OF CHANGE -
IMPROVING THE MODEL

by Simon Lord,
last updated 10/09/2010

In the second part of our review of the last decade in New Zealand franchising, we look at the way that systems and perceptions have changed

When New Zealand discovered franchising through lawnmowing in the 1990s, it was the start of a revolution. Since then, franchising has been applied to everything from business coaching to horticulture. A look through the first years of Franchise New Zealand magazine from 1992 suggests that the sector was initially dominated by home services; however, the last decade has seen the range of franchises broaden considerably, particularly in the business and financial sectors. The food sector has retained most of the familiar names from the turn of the 21st century and added some new ones, while retail possibly offers fewer options than before as rent rises, online shopping and, recently, the recession have all taken their toll of niche retailers. Expect it to bounce back as the economy recovers.

In terms of the sheer number of franchisees, though, home services is still the largest individual sector. Green Acres has been the biggest operator in this sector since the early 1990s, but it has plenty of competition from the home-grown Crewcut and Mr Green as well as Australian imports V.I.P. and Jim’s, both of whom have been established here for many years. A relative newcomer, @ Your Request, entered the market in 2005 when Green Acres founder Adrian Kenny sold his share in the original company and set up a new competitor aiming at the top end of the market. At one time, many pundits predicted that there were too many home services brands and that they would have to amalgamate to remain profitable, but that hasn’t happened yet. A bigger challenge has been that the competition between brands (and independents) has kept down prices, meaning that it is no longer as easy for disgruntled employees to double their wages by buying a lawnmowing franchise. As a result, today’s home services franchisees need to work smarter and today’s franchisors need to be more switched on about recruitment and support to achieve the same results.

One sector that has mirrored the boom and bust of the economy is financial services. Mortgage broking turned from a little-understood concept into a hugely popular service as everyone put their trust in property and Mike Pero, Mortgage Choice and others became – literally – household names. As banks increasingly steered customers towards online banking, so the personal broking business grew. The finance houses ultimately responded by changing the basis on which commissions were paid and, in some cases, buying out the franchisor companies. This has enabled the franchises to offer a broader spectrum of products, such as insurances but, as with home services, the systems have had to reinvent themselves to survive. Adam Parore’s purchase of Small Business Accounting and the addition of his original Adam Parore Mortgages business to the SBA product offering looks like a shrewd move in retrospect.

Building Better Systems

Apart from market changes, other experiences over the past decade have also pointed to the need for franchisors to upgrade their systems and their offerings on a regular basis in order to maintain their competitive advantage. According to David McCulloch of The Franchise Coach, whose knowledge of the franchise sector goes back to the 1980s when he founded the Arano Juice franchise, ‘The most important factor impacting on the both franchisees and franchisors over the last decade is the use of the internet. This has resulted in gains in productivity and the ability for up-to-the-minute key performance indicators to be shared between all franchisees with little effort. Gone are the days of monthly handwritten or Excel data being provided to the franchisor by the 10th of the month following.

‘Today, computer-based till and accounting systems (like the one Franchise New Zealand test-drove with Columbus Coffee in 2008) make it possible to collect, share and analyse all sorts of data. Franchisee discussion forums, marketing material, customer management tools and databases are now commonplace among franchise networks,’ says David.

But measuring is one thing and managing is another. David and his fellow franchise consultants report that, in recent years, an increasing proportion of their work has come from assisting franchises who grew fast during the boom times of the early 2000s and are now seeing their weaknesses exposed. ‘There were poor franchisee selection techniques, wrong territory sizes, lack of training, inability to fund proper support, inadequate manuals and, sometimes, fundamental flaws in the way that a franchise is structured that make it very difficult for both the franchisees and the franchisor to remain profitable when times are tough. The best franchisors addressed these issues early on; good franchisors took remedial action before the recession and some have only recently recognised the problem. In general, though, management standards within most franchises are much higher than they were ten years ago and franchisees are much better for it.’

Daniel Cloete, who has been national franchise manager for Westpac since 2000, agrees. ‘Franchisors in general are more prepared to get expert advice than they were 10 years ago and their head office structures became a lot more professional, but there is still some scope for improvement. Likewise, point of sale and management information systems and software have improved dramatically, giving franchise systems access to better management tools. That – along with the high growth rate of the industry – has meant the scope and depth of franchise funding has increased considerably over the decade, with equipment funding and other options becoming more available.’

An Improving Image?

It’s not just finance providers who have a better perception of franchising, either. While the word ‘franchising’ still meets with a negative response from some members of the public, the sheer size and number of businesses that operate through a franchise model has forced the general media to become better informed and more balanced in its reporting. This was best illustrated in 2008 after news broke of the alleged scam which saw non-existent Green Acres franchises sold to around 200 Chinese immigrants. Despite the potential for an anti-franchise media frenzy of the type sometimes seen in Australia, the media here took a mature approach that divorced the apparent crime from the franchise model – in fact, the New Zealand Herald devoted a supportive editorial to the topic.

Specialist franchise lawyer Stewart Germann says that the legal system also has a better understanding of franchising now. ‘It is inevitable that there are always going to be disagreements in any commercial relationship, and so a number of franchise disputes inevitably end up in Court,’ he says. ‘Ten years ago, there was certainly a perception that judges favoured franchisees and franchise agreements were not necessarily upheld as they might be now. I think that situation has changed, and in fact I believe last year’s Court of Appeal judgement in the David case (which upheld the effectiveness of notices to franchise buyers that they should get their own specialist advice) goes too far in the opposite direction. Nonetheless, the Fair Trading Act 1986 and the Contractual Remedies Act 1979 are very useful and powerful statutes for the protection of franchisees and the Courts’ increasing understanding of franchising is helping to define what is and isn’t acceptable.’

The Great Regulation Debate

Of course, it is impossible to discuss the legal status of franchising without mentioning possibly the hot topic of the last decade – should franchising be regulated? The Franchise Association launched its Code of Practice for members in 1997, and it has been updated several times since, but membership of the Association is voluntary (it has around 140 franchisor members). Towards the end of the decade, FANZ terminated some memberships for Code breaches for the first time but the Code itself has no regulatory status.

The introduction of regulation in Australia in 1998 and its many subsequent reviews stimulated regular debate in New Zealand (and in the pages of this magazine) before the Green Acres case brought about a formal Ministerial Review of the sector. Reaction to the announcement of a review was mixed: even the Franchise Association initially supported the idea of positive regulation, although after canvassing its members its eventual submission came down in favour of the status quo.

 The Review was commissioned under a Labour Government but reported to a National one, which concluded that no regulation was required. This brought a mixed reaction from the franchise sector: while many franchisors were pleased not to be facing additional compliance requirements, others felt that an opportunity had been missed to drive bad operators out of the market and set higher standards for new entrants. A very real concern expressed by many opponents of regulation was that once it was accepted, the risk of restrictive over-regulation and the temptation for politicians to meddle, as in Australia, was too high. Only after the decision not to regulate was announced did former Minister of Small Business Lianne Dalziel, who commissioned the Review, say that, ‘'I personally favoured enhanced self-regulation through the Franchise Association.’

A University of Auckland Business School research paper by Gehan Gunasekara, an academic who has taken a keen interest in franchising issues, and Tiffany Lee is critical of the Review process. It concludes that the lack of publicity given to the Review itself and the failure to give submitters an opportunity to be heard meant that it was fundamentally flawed from the outset. The paper contrasts the process unfavourably with Australian enquiries and finds that ‘a disproportionate number of interest groups made submissions and most of these had a vested interest in preserving the status quo.’

More To Come

The regulation issue is sure to be raised again every time that a franchise-related business failure hits the headlines as, occasionally, it is bound to do. If New Zealand follows the apparent trend overseas for disgruntled franchisees to wage a publicity war by internet, the number of those headlines could actually increase.

That doesn’t mean that franchising overall will be adversely affected, though. While there have been some high profile disputes and the occasional downright fraud in the past decade, the number of real issues has been surprisingly low given the huge popularity of franchising and the sometimes complex nature of franchise agreements. Surveys from earlier in the decade suggest that fewer than one percent of franchisees have actually been involved in a significant dispute.

Providing new franchisees are encouraged to make wise choices and, as the Ministry Review suggested, take professional advice, and providing franchisors make good use of the tools and services available to them for ongoing improvement, franchising looks set for continued expansion for the next decade. The only question is: what will be franchised next?

This article first appeared in Franchise New Zealand magazine Volume 19 Issue 2. Read the first part here.

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